Navigant Research Blog

Last week was a busy one in the demand-side management (DSM) industry, with M&A activity and regulatory news both making headlines. It started first thing on the morning of May 2 with the announcement that Opower was being bought by Oracle for over $500 million. This move shouldn’t be so surprising since it was just over a year ago that the two companies announced a partnership to enable utilities to integrate Opower’s tools into Oracle’s systems and vice versa.

EnerNOC is now the only publicly traded pure-play DSM provider left standing. Could it be that dealing with the regulatory risk and long timeframes for deal making in the utility industry is a mismatch with Wall Street’s pressure for quarterly earnings? Opower appeared to have a good pipeline of projects, but the market did not seem to value it enough to provide attractive returns for investors. Furthermore, the energy software business requires extensive R&D spending, so the prospects for an annual profit were too long for the NASDAQ set. As part of a larger organization, the long project runways could be blended in with other quicker turnaround products, and R&D expenditures could be swallowed among the much larger expenses at Oracle. The only question is how committed Oracle is to Opower’s legacy DSM products versus focusing on solutions more directly in line with its business.

CPower on the Move

Later that same day, word spread that CPower acquired rival Johnson Control’s Integrated Demand Resources business. This move thins the already-small commercial and industrial demand response (DR) aggregation sector. It also continues the trend of larger organizations getting out of the DR business, which started when Constellation sold off CPower in 2014. For CPower, the acquisition is the latest move to expand following the purchase of Demand Response Partners in 2015. CPower and Johnson Controls still intend to retain a commercial relationship that would allow CPower to offer DR services to Johnson’s customers, and CPower customers could gain access to Johnson’s building management technologies for their facilities.

These cases appear to show some contradictory trends between acquisitions and divestitures of DSM businesses by larger entities. However, they both seem to agree on the point that DSM may survive either as part of a bigger firm or as an independent private company, but as a standalone public entity, the road ahead is hard. Look at Comverge, which went public in 2007 but went back private a few years later and has seemed to steadily grow under the radar since then, or Nest, which is able to keep its finances out of public view as part of the Google empire.

If the first week of May was any indication, it could be an interesting summer for DSM, but these recent developments may have been just some early fireworks before a regular course of business settles in.

As 2016 begins, we are thinking about improving utility business models, including new ways to engage customers and take advantage of the developing trends in energy usage and resource transformations. To that end, Navigant Research is unveiling a new research service called the Utility Technology Disruption Report series. The intent of this new service is to look at emerging concepts that provide both threats and opportunities for utility executives to be aware of and to address either from a defensive posture or from an aggressive position.

The first installment in the series focuses on Bring Your Own Thermostat (BYOT) demand response (DR) programs. The residential DR program model of offering one thermostat model to customers is not sustainable due to ongoing technology advancements and the integration of more software with the hardware. Today’s consumers want more choice in how they participate in DR programs and what devices they use to participate with the features that they desire.

BYOT can be less expensive than traditional direct install DR programs by lowering customer acquisition and device incentive costs. It can also increase energy efficiency program participation, enable dynamic pricing adoption, and engender greater customer engagement and satisfaction. However, BYOT gives less operational control of DR resources to the utility, so control room operators must get comfortable with dispatching it. Furthermore, new DR program management processes and systems will be required in order to optimize new program designs and minimize customer complaints, avoiding the disruption of existing program offerings and any negative repercussions.

Pilots Underway

BYOT projects are in the pilot phase right now at utilities like Con Edison and Austin Energy and are expected to be ready for larger deployments in the near future after initial evaluation results are known. Approximately 50,000 U.S. customers are presently engaged in BYOT programs, representing an estimated $12.5 million market. However, BYOT customers present a potential target market of about $1.4 billion and could reach 10% of the residential DR market over the next several years.

In order to promote the release of this new report series and to dive deeper into the BYOT concept, Navigant Research will host a free webinar on January 19 at 2:00 EST. I will be joined by two other Navigant experts on DR and consumer trends: Stuart Schare, Managing Director, will discuss how BYOT fits into a utility’s DR program portfolio; and Neil Strother, Principal Research Analyst, will explain how the expansion of the Internet of Things (IoT) plays into electricity customer engagement.

Navigant Research is excited to announce this new service offering and looks forward to providing more value to utilities as they explore new growth opportunities in 2016 and beyond.

Energy efficiency programs emerged during the 1970s energy crisis to help consumers cope with rising energy prices by delivering more products and services for the same energy input and restraining the growth in energy consumption. Today, energy efficiency has evolved to become an integral part of utility operations, not only as a method for reducing demand, but also as a way to expand service offerings and engage customers.

However, traditional utility business models—which date back over 100 years—tend to be based on increasing profit by increasing electricity sales. Thus, increasing energy efficiency measures and consequently decreasing electricity sales can result in decreased revenue for utilities. Many utilities have responded to this issue by proposing steep rate increases, though utilities cannot simply increase rates when it suits them. State laws require utilities to make a formal proposal to their public utility commission in the form of a rate case. Wisconsin’s Madison Gas and Electric filed a rate case in 2014 to increase its fixed charges (a part of the energy bill that customers must pay regardless of the amount of energy they use) from $10 in 2014 to $67 by 2017. Kansas City Power & Light also filed a rate case to increase its fixed charges from $9 to $25, though the Kansas Public Service Commission only allowed the fixed charges to rise to $11.88, an 11.7% increase. The new rate became effective on September 15, 2015.

Spurring Innovation

Yet, many utilities are embracing the changing landscape and finding more innovative solutions to their decreasing revenue beyond increasing rates. Some utilities are transitioning from commodity providers into service providers; a handful of big utilities in Arizona, Georgia, Michigan, and Texas have begun competing with solar vendors to provide their customers with rooftop solar. CPS Energy’s vice president of corporate development and planning, Raiford Smith, stated, “The whole theory is you need to serve your customer or someone will serve them for you.”

Demand-side management (DSM) programs are also becoming an increasingly popular option, as these programs can often be an inexpensive way for utilities to expand service offerings, engage customers, and save on expensive infrastructure. For example, Consolidated Edison is working with analytical DSM vendor Retroficiency on a Brooklyn/Queens DSM program in order to shed 52 MW of load and to avoid building a new $1 billion substation. Commonwealth Edison, Glendale Water & Power, Baltimore Gas & Electric, and Consumers Energy are all working with behavioral DSM vendor Opower to implement behavioral demand response, a type of demand response (DR) that uses behavioral sciences to encourage customers to reduce their consumption during DR events. Arizona Public Service Company (APS), an Arizona-based utility, is implementing time-of-use (TOU) rates, which makes energy more expensive during times of peak demand and cheaper when there is less demand to encourage customers to shift their consumption. Approximately 52% of the utility’s 1.2 million customers are using TOU rates, the most of any utility in the United States.

The market for these types of products and services is growing, as discussed in Navigant Research’s recently published report, Behavioral and Analytical Demand-Side Management. Innovative utilities are setting an example for those dedicated to older, more traditional business models, revealing that energy efficiency and helping customers reduce their bills and consumption is an opportunity for increasing business, not a threat.

The amount of DR capability in North America has grown considerably in the past 5 years, both at utilities and within competitive markets such as PJM. However, DR technologies and policies have generally relegated DR to a minor role as a last-called resource. DR has typically been slower to respond than combustion turbines, and the load relief it provides has been difficult to assess precisely (if at all) in the real-time operating environment in which control center staff operate. Furthermore, regulatory policies in support of DR have generally focused on the magnitude of megawatts achieved at the expense of the quality and usefulness of those megawatts. However, slowly but surely, this trend is changing.

The use of DR in grid planning and operations has solidified as utilities increasingly rely on DR to meet installed capacity requirements and sometimes even operating reserve requirements. Furthermore, independent system operators led by PJM have incorporated DR into procurement mechanisms for capacity, energy, and ancillary services. Industry acceptance of DR as an integral part of the future grid continues to grow, with states like California and New York rolling out major regulatory initiatives and utility Hawaiian Electric issuing a request for proposals to DR aggregators for the provision of grid services, including ancillary services, from demand-side resources. So which technologies and policies will drive DR into the future as a more integrated and valued resource?

The Peak Load Management Alliance (PLMA) is hosting a free webinar on November 12 at 12:30 EST to highlight the significant regulatory and utility strategy initiatives taking place in Hawaii, where massive customer investment in behind-the-meter PV is encouraging Hawaiian Electric to develop innovative uses for DR to help manage the grid in real time. This could be the future for many utilities that are only now seeing the first effects of customer investment in renewables, storage, and other distributed energy resources.

This is a follow-on discussion from a Power Engineering article by Navigant regarding how a new era of DR is blurring the lines between generation and demand-side resources in Hawaii and elsewhere. The article covered some of the emerging DR technologies that are allowing DR to be viewed more on par with generators and reviewed new applications that are raising DR’s prominence as a valued resource alternative for utilities and system operators. Looking ahead, emerging state policies and utility initiatives are driving DR to a heightened prominence that would have been difficult to envision just 5 years ago.